Pakistan's worsening numbers raise questions over role of China and IMF

Who does Pakistan turn to in the event of a new liquidity crisis: to China or the IMF? Widening trade and current account deficits and dwindling FX reserves could mean the South Asian country has to make up its mind sooner rather later

  • By Elliot Wilson
  • 13 Oct 2017
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Harald Finger
Finger: economy a 'concern'
Chinese investment in Pakistan is proving both a blessing and a curse, with the South Asian economy facing another period of deep financial stress unless it ramps up exports and tackles a yawning trade deficit, experts warn.

Pakistan’s trade deficit widened to $12.1bn in the year to the end of June 2017, from $4.9bn the previous year, according to the Bureau of Statistics, with the current account deficit tipped to hit 5.8% of GDP in June 2018, against a previous target of 3.8%. 
Pakistan’s near-term issue is its rapidly dwindling FX reserves — they fell to $13.86bn in September, down 25% on last year’s figure, and the lowest rate recorded since 2013, the year Pakistan secured a $6.6bn bailout from the IMF.
China’s policy lenders have come to its aid twice over the past 12 months, stumping up $1.2bn in loans to stave off a currency crisis. But this creates a quandary. Who do the nation’s politicians turn to now in the event of a new liquidity crisis: China, or the IMF?
Harald Finger, the chief advisor to the IMF’s Middle East and Central Asia department, who oversaw the bailout, refused to be drawn on the issue, drily noting that Pakistan had “not requested another loan programme”. 
But others wonder if the Fund would even be allowed to engage with the Pakistani government. “Given how much China is investing in Pakistan, I don’t think [they] will let Pakistan go to the IMF for assistance,” said Thomas Hugger, CEO of Hong Kong-based frontier-market investor Asia Frontier Capital.
“If the IMF comes in, they’ll want to have reforms, and they might clamp down on things. So I think Pakistan might go directly to China for money rather than IMF.” The issue is whether China will stump up fresh capital to bail out its struggling southern neighbour again.
Finger said the country’s macroeconomic picture was 
“a source of concern that needed to be taken seriously. Policy action should be taken swiftly, including a resumption in fiscal consolidation, a move to more exchange rate flexibility, and structural reforms aimed at strengthening growth prospects by attracting more private-sector investment.” 

Pleasure and pain

China is the source of most of the country’s pleasure, as well as its pain. The China-Pakistan Economic Corridor, part of the far wider China-led Belt and Road Initiative, involves up to $60bn being spent on infrastructure by policy lenders and state enterprises. That is boosting growth and alleviating energy bottlenecks that long held back the economy. The IMF tips the economy to grow by 5.6% in the current financial year to end of June 2017.
But debts owed to China’s policy banks and other external obligations related to the economic corridor and other energy sector projects “will start to come due in a few years’ time.

  • By Elliot Wilson
  • 13 Oct 2017

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